DCIT CENTRAL CIRCLE 3(1) , MUMBAI vs. LUCENT DIAMONDS , MUMBAI

We have carefully heard the rival submissions, gone through written submissions filed before us and perused relevant material on record including the cited order of the Tribunal in assessee’s group concern. Our adjudication to the subject matter of appeal would be as given in succeeding paragraphs. 3.1 The material facts in AY 2012-13 are that the assessee being resident firm was subjected to an assessment u/s 143(3) r.w.s. 153A of the Act on 29/12/2017 in view of the fact that M/s Sur Gems group was searched u/s 132 on 18/11/2015. The assessee being part of the group was also covered under the search and seizure action. Accordingly, notice u/s 153A was issued to the assessee on 21/02/2017 which was followed by other statutory notices wherein requisite details / explanations were called from the assessee. The assessee group was stated to be engaged in import and exports of diamonds. 3.2 The statement of key person of assessee group i.e. Shri Saket Sudhir Mehta was recorded u/s 132(4) wherein he was directed to explain the modus operandi of purchases made by various group concerns since there were allegations that the assessee group indulged in accepting accommodation entries of bogus purchases. These purchases were stated to be made from alleged bogus concerns being run / operated by Shri Bhanwarlal Jain group who was also subjected to search action u/s 132 on 03/10/2013. During search operation on that group, it transpired that the various concerns being run by that group merely indulged in providing accommodation entries without doing any actual business. Though the various statements made by Shri Bhanwarlal Jain group were confronted to Shri Saket Sudhir Mehta of assessee group, however, he denied that the purchases made by his concerns were accommodation entries. During assessment proceedings, in support of purchase transactions, copies of purchase invoices, quantitative details, bank statements evidencing payment through banking channels, confirmed ledger accounts with PAN, correlation of corresponding sales with purchases were furnished. The attention was drawn to the fact that the purchased goods have subsequently been sold and therefore, purchase could not be doubted. Reliance was placed on various judicial pronouncements to support the submissions. 3.3 However, the said submissions could not find favor with Ld. AO who ultimately disallowed the purchases of Rs.470.66 Lacs stated to be made from 4 concerns being controlled by Shri Bhanwarlal Jain group and added the same to the income of the assessee. 4.1 Before Ld. CIT(A), the assessee, inter-alia, submitted that import of rough diamonds as well as export of polished diamonds was certified by the custom authorities. Further, complete quantitative tally was provided in Tax Audit Report in Form No.3CD and there was correlation of purchases with corresponding sales and the profits arising there-from was already offered to tax. The attention was drawn to the documentary evidences submitted during the course of assessment proceeding to establish the genuineness of the purchases transactions. The assessee also pointed out that adverse statements made by tainted group could not be used against the assessee unless an opportunity of cross- examination of persons making those statements was provided. 4.2 However, going by the findings of search team in the case of Shri Bhanwarlal Jain group that his concerns merely indulged in providing accommodation bills without doing any real business, Ld. CIT(A) opined that the assessee’s claim could not be accepted in totality. Regarding cross-examination, it was noted that none of the suppliers was found at the given addresses and they did not respond to notices u/s 133(6). Even the assessee failed to produce any of the suppliers and therefore, the basic onus as casted upon assessee was not discharged. 4.3 In the above background, Ld. CIT(A) opined that profit element embedded in these transactions was to be brought to tax as held by Hon’ble Gujarat High Court in the case of Smit P. Sheth (38 Taxmann.com 385) and various other decisions as enumerated in the impugned order. Since the average Gross Profit earned by the assessee in past two non-tainted years worked out to be 13.36%, the rate against the tainted purchases was estimated at 15% which was to be reduced by profits already shown by assessee against these purchases in the books of accounts. 4.4 Aggrieved, the revenue is in further appeal before us whereas the assessee has raised cross-objections challenging the rate of 15% as adopted by Ld. CIT(A).

We find that assessee is part of M/s Sur Gems Group. The said group was subjected to search action in view of the allegations that the group obtained accommodation bills from various concerns run by Shri Bhanwalal Jain Group. During search operation on that group, it transpired that these concerns were merely issuing accommodation bills without carrying out any real business. The same is further evidenced by the fact that notices u/s 133(6) did not elicit any response and none of the suppliers was found at the given addresses. The assessee also failed to produce any of the suppliers to confirm the transactions. Therefore, the basic onus to establish the genuineness of the purchase remained un-discharged. At the same time, the assessee was in possession of purchase invoices and the payment to the suppliers was through banking channels. The ledger confirmation as well as PAN of suppliers was placed on record. The import as well as exports was certified by the custom authorities. Further, complete quantitative tally of stock was provided along with correlation of purchases with corresponding sales. There could be no sale without actual purchase of material keeping in mind the fact that the assessee was engaged in trading activities. Therefore, the factual matrix, in our considered opinion, would make it a fit case for estimation of profit element embedded in these purchase transactions to plug the possible leakage of revenue. Therefore, the approach of Ld. CIT(A) in estimating the profit could not be faulted with. So far as the estimation made by Ld. CIT(A) is concerned, we find that under similar facts and circumstances, the coordinate bench of this Tribunal, in the cited order of M/s Sur Gem (an associated concern of the assessee) has estimated profit rate of 6% of bogus purchases minus GP already declared by the assessee. The said estimation is in accordance with CBDT instruction no.2 of 2008 dated 22/08/2008 wherein the CBDT has directed all the AOs to accept profit of 6% in diamond business. The assessee, in the present case, has reflected GP rate in the range of 3% to 3.5% in AYs 2012-13 & 2013-14 as is evident from its financial statements. Therefore, following the cited decision of Tribunal and for ease of computations, we direct Ld. AO to make addition of 3% (net) of tainted purchases without any further benefit. The same works out to be Rs.14,11,982/- (3% of Rs.4,70,66,091/-) for AY 2012-13 and Rs.4,81,103/- (3% of Rs.1,60,36,782/-) for AY 2013-14. The addition to that extent stand confirmed in both the years. In the result, assessee’s cross-objection stands partly allowed. The revenue’s appeal for AY 2012-13 stands dismissed. This ground of revenue’s appeal for AY 2013-14 stands dismissed.

The only surviving ground in revenue’s appeal for AY 2013-14 is with respect to disallowance of labour charges. The relevant facts are that during search action, it was observed that huge labour charges were paid by assessee group to various concerns. Evidences in the form of rubber stamps of various concerns to whom labour charges were paid, were found. Accordingly statement of assessee’s accountant as well as financial officer was recorded during the course of search operations and question relating to labour charges were put to both of them. The assessee’s accountant made admission that invoices seized in respect of labour charges were prepared by her in respect of various entities on office computer. The question relating to seizure of rubber stamps could not be replied satisfactorily. The labour bills were stated to be prepared on the instructions of Shri Saket Sudhir Mehta since the labour parties were not qualified enough to do the paper work. Shri Saket Sudhir Mehta admitted that invoices were prepared on his instructions to make payment to the persons / entities in the form of labor charges. However, the allegation that these expenses were bogus, were denied in the statement.

Upon due consideration of factual matrix, it is evident that the assessee imported rough diamonds and exported polished diamonds during the year. The conversion of rough diamonds into polished diamond would certainly require certain labour / job work as rightly noted